Why Paige St John won’t have to worry about the Wall Street Journal taking her Pulitzer Prize for insurance reporting.

I now try to avoid telling people how many years I’ve run both my own accounting practice and helping my much larger private sector clients prosper in one of the most competitive industries in our economy so I don’t betray the fact I’m on the fast downhill slide to the big five-oh. That said and in light of true participation in the market economy of this once great nation there are times I read something in a national finance publication and I wonder which ivory tower these people have been smoking crack in. So along those lines through time I’ve blogged here on Slabbed the folks over at the Wall Street Journal have come up a time or two.

Sadly I must report I did say the WSJ Editorial Board were a band of “lit and hallucinating buffoons” but that was only because they were unfavorably comparing a solvent state-run insurer of last resort in Florida Citizens with an insolvent one in Louisiana Citizens. The stupidity was simply stunning folks but these Ivory Tower sellouts are the same bunch that gave us the 2008 market crash and 10+% unemployment with their self-serving no-regulation rhetoric so I frankly should have never expected much from ’em.

1. The cushions of the state windpools are at risk from actually having to pay claims.

2. Rates are too low thus the states themselves are at risk once the reserves are exhausted.

3. Inland taxpayers and ratepayers are somehow subsidizing people to live in beach houses.

What the story doesn’t say is:

1. Many state run windpools are restricted from building up reserves and denied access to the same capital markets the private insurers tap.

2. The anti trust exemption the insurance industry enjoys prevents risks from perils like Hurricanes from being spread, which is also a basic tenet of insurance solvency theory.

3. The state wind pools are the brainchild of the insurance industry itself and designed to be as financially painful on the consumer as possible. To the extent that same bunch bitches about same also tells me there is also another financial angle in play of which they do not speak.

5. The insurance industry is a oligopoly which means that coupled with the anti trust exemption there are lots of opportunities to price fix.

6. It is certainly true in Mississippi and likely true in all the coastal hurricane states that the coastal areas generate a disproportionate share of the state’s economic output thus exposing the inland insurance subsidy argument as BS. Far from a subsidy these setups should be viewed as an investment and a damn good one at that. I think even our own Boss Hogg would agree with that.

Now if the WSJ is content to let insurance industry blow smoke up their asses and pass that off as news all I can say is News Corp will be News Corp folks and them guys are not known as a bastion of journalistic ethics. That said we are very curious souls here at Slabbed and just last night I was wondering what would happen if Hurricane Irene were to bypass the North Carolina coast then taking a left hitting midtown Manhattan and the Insurance disInformation Institute before going up the III’s Bob Hartwig’s rectum. Luckily for me, Nate Silver over the New York Times 538 blog uses rigorous statistical analysis to determine the answer, which did not come as a surprise to this jaded but seasoned observer of the insurance industry: It will take a Cat 5 to dislodge all the bullshit from Hartwig’s bod and the resulting collateral damage could run to the trillions. One beneficial side effect is the dislodging of the many heads from perpetual rectal insertion in Washington DC so the overall impact could turn out a net economic positive over the longer run.

I’d like to thank our own Brian Martin for alerting me to this propaganda piece and I hope he reprints his letter to the editor regarding same in comments.

The article about state insurance pools in coastal states was poorly researched. You need to follow the money. For hurricane (or earthquake or flood) insurance to work, the insurance pool needs to save and invest the surpluses in all those years without a disaster in order to build sufficient reserves to cover a major event. The current state pools were designed by and for the insurance and reinsurance industries and they pocket almost all of the premiums. Coastal property owners are paying more than enough in premiums to cover their expected losses at least three times over, but the premiums are not staying in the insurance pools.

In the 2010 fiscal year, the North Carolina Beach Plan wrote more than $300 million in premiums, paid less than $12 million in claims and adjustment expenses, yet added only $22 million to its surplus. Two-thirds of the premiums ($198 million) were sent to Bermuda and elsewhere for reinsurance. Another $52 million went to agent commissions and other administrative costs. The wind pools have been written into a horribly inefficient trap: they have to spend most of their income overpaying for reinsurance because they do not have enough reserves to cover a catastophic event, but they cannot build up the needed reserves because most of their premiums go to reinsurance.

The problem is not that coastal residents are not paying sufficient premiums. The problem is that state insurance commissioners and insurance companies have rigged the coastal insurance markets to allow the reinsurance cartel to loot coastal insurance plans and coastal residents.

The whole premise of the WSJ piece is the false perception that the wind pools are state-run government agencies, but look at the Board of Directors of the NC Beach and Fair Plans:

11-member boards consisting of 4 insurance company reps, 4 insurance agents, and 3 non-industry representatives. The political appointed non-industry reps on the Beach Plan board are a homebuilder, a realtor, and a law professor. No bureaucrats are involved and coastal policyhoders are not represented.http://www.ncjua-nciua.org/Misc/2010-2011%20%20Bo…

Uncontrolled non fact based stock bashing has its downside. This is a shame because he is a great speaker on fraud.

Brian when it comes to covering their big advertisers the WSJ falls woefully short journalistically. Remember the Op-Ed they ran from a State Farm director on the Katrina litigation without bothering to identify him as such? Sold out corporate whores may seem a strong description but it actually fits to the T.

After Katrina private insurers dropped policies en masse from Texas to Cape Cod. All these state pools had to double, triple, or quadruple the major hurricane exposure in 3 or 4 years without any ability to build up their reserves to keep pace with the new exposure. The pools can't turn anyone down to limit their exposure to what their reserves will cover. That created the inelastic demand for reinsurance that enabled the Bermuda reinsurers and their investors to prey on the pools and their policyholders. The reinsurers can charge 8 to 10 percent rates on line to cover one percent risks and the industry-friendly wind pool boards never question whether their is a better and much cheaper option. Florida is the only state that has tried to keep the premiums in state instead of letting Bermuda skim off 2/3 of them.

The insurance and reinsurance industries have hired a bunch of House and Senate staffers as lobbyists, especially former Senate Banking Committee and House Financial Services Commitee staffers. They don't have to influence the majority of Members of Congress, because most of them don't care about coastal insurance issues, including many Senators from coastal states. They only need to make sure that the committee and subcommittee Chairmen and Ranking Members block any insurance reforms from coming to a vote. The Senate committee staffer for Sen. Dodd in 2008, when Dodd and Shelby sabotaged any meaningful attempt at hurricane insurance reform, left to lobby for Renaissance Re immediately after that session of Congress ended.

Renaissance Re is the biggest Bermuda reinsurer and is State Farm's partner in several Bermuda reinsurance ventures. RenRe went all out against Gene Taylor's bill to create an option for hurricane insurance with wind and flood coverage in one policy, and against Ron Klein's bill to create a securitized federal reinsurance program for the state-sponsored insurance pools: http://www.opensecrets.org/lobby/clientsum.php?id…

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